Fair contract salary compared to permanent salary

Question

Let's say I have a position open, it can either be contract or permanent position. What is a fair amount of money I should pay for the contract position, if I am willing to pay X per month for the permanent role? Contract pays are inevitably higher, because the contractors are not entitled for a lot of benefits, and are not guaranteed a job. I know the exact ratio of contract to permanent varies from person to person, but I need a rule of thumb here.

Answer 1

It depends on the market - since that is what sets the rates. In my experience there is little corelation between market contract rates and market permanent role rates since there could be more or less of each available at a time. Also, the price of candidates varies with experience and skill set - so be prepared to raise your rate if the perfect candidate appears. The price of a candidate may further fluctuate based on contract duration. Some candidates will take a slightly lower rate for a guaranteed longer contract for example.

I suggest getting in touch with recruitment agencies in your market. They can be a bit of a slimy bunch. Remember they are entirely motivated by placing a candidate since this makes them money so take individual recruiters information with a grain of salt. If you talk to enough of them then you can get an idea of the average cost of local talent.

Answer 2

It's really not that simple. You can't apply fixed ratios because contract rates are defined by market forces. Contractors will want as much as they can get elsewhere so you'll need to keep your ear to the ground.

If that's too much work for you, asking for fixed-price project quotations between a few contractors (letting them know they're effectively bidding for the work) will make sure that bids are reasonable.

Answer 3

Depends on what you get for a permanent job, which depends in part on the country you're living in: - pension - social security asssurance (unemployment, illness, dental, etc.) - job security (how easy can you be fired)

Also, you'll usually get when working for a permanent job, someone who does for you: - marketing - administration (book keeping etc.) - chasing customer for paying bills - finding new work for you

Finally, take into account the amount of taxes you have to pay at the end of the year.

Answer 4

If you are the one making the offer for contract or permanent, and you prefer neither, then just price contract at what the perm position would actually cost your business. As a rule of thumb, that's usually 1.5x to 2x the gross paycheck that the employee sees.

Factor in benefits, sick days, training, office space (if it's a remoteable position), severance, layoff notice, unemployment, Social Security, etc. and you'll probably get close to 2x.

Since long term contractors and employees are effectively competing with each other, the market rates will have already been included by your salary and benefit offering.

Answer 5

I'd like to mention that while cost is naturally a big piece of the equation, you may also consider what you're getting for the money. In my experience, I will hire a contractor when I want expertise in a specific arena. Having a contractor do the work will sometimes save money in the long run because they may do it faster and produce better quality of work then an all purpose employee. Obviously this is also a variable because maybe you have a number of a all purpose things to accomplish and you may not see that benefit as much as someone that needs a very specific task accomplished.

Answer 6

A rule of thumb is that somebody working as a contractor should receive between 50% and 100% more than what (s)he would receive as a permie. If the permie is eligible for a bonus, then that number should move nearer to 100%.

[Edited after the down-vote to add the all-important "more".]

Answer 7

In my experience contract is about 2x of a full time position, for reasons already covered (benefits, taxes, perceived lack of security, etc).

Full time compensation for a given skill level follows a diminishing curve, where it pretty much flattens out at the senior level no matter how good you are (apparently).

The skill vs. pay graph for contract pay starts disproportionately high, stay flatter in the middle rates (50-65), and then climbs well into the triple digits.

BTW, remember that the contractor is often a full time employee of the headhunter. The headhunter takes between 20-40% of it.

Answer 8

To get a ballpark figure to start from, the way I always work it out is to take the annual salary that the role is worth in 1000's and use that as the hourly rate.

So for a role with a 30k per year salary I'd be looking at a contractor rate in the region of 30 per hour.

If you do the maths it works out at roughly double the annual salary - which is what most people have said already - but I find it easier this way as a contractor rate is usually quoted as an hourly/day rate rather than an annual figure and this does it all in one step.

Then you need to adjust the figure according to the market conditions, the type of work, and the length of contract - but it's usually a good starting point.

Answer 9

A colleague of mine uses the following to calculate his daily rate:

(perm_salary * 2) / no_working_days_per_year

Answer 10

I'm a junior but from what I hear, contractors in Toronto, Canada get paid only 30%-40% more. If i'm wrong, please correct me! References to your figures will be very helpful.

Answer 11

well if you have long term contract say for a yr or 2, then you should just go for it even though hourly rates may be just 30% more. If not long term then depends on your risk taking appetite and your confidence to find another after the current contract.

assume this: Employment tax is 7.5% of salary (avg. that employer pays) And benefit is around 12% of salary (avg. including medical + holidays etc) so anything over 20% of your salary is your profit.

Answer 12

Nitin... your 20% profit totally discounts that the average employee gets paid for an extra 4-6 weeks that the contract employee does not get paid for! They get 10 days of vacation, 6-10 days of sick days, and 10-12 paid stat holidays. That is 26 to 32 work days that contractors have to work and employees do not. Most benefits account for between 15-30% of your salary as an employee. How could the extra hours needed maintain your 20%?

As far as I am concerned... this is at least a 10% hit on top of your 20%... at a MINIMUM! If I am taking a $75,000 employee position, I would have to charge at least $48-$52 putting me between $100,000 and $110,000. If it was a short-term contract (3-6 months) with little or no chance of extension or if I was doing tasks that none of their employees could complete, I would have no problem asking for $72-$75 /hr ($150-$156k)

Shayne

Answer 13

The issues of Contract vs. Permanent can't be resolved by a simple costing formula. You also need to consider how you want the employee to fit into your team. In my experience an employee's designation affects all of their professional relationships.

Personally, I enjoy the freedom of being a contractor, because you know that you're employed because of your capabilities. Also, you're often a step removed from the politics of the workplace and this can make your job simpler.

As for a formula I use:

AnnualPermanentPackage = ContractorHourlyRate*WeeklyHours*0.75*52

This is for Australian conditions and for a fulltime job. Decrease the coefficient, 0.75 to 0.60 say, if it's a parttime job.